Question

The following question, which has several parts, deals with various aspects of a gold standard monetary system.

a. What are the economic consequences of adopting a gold standard on the magnitude of business cycles?

Answer 1

By adopting a gold standard a country loses the ability to formulate economic policies in such a manner that can suite domestic conditions . Using a gold standard sudden devaluation cannot be allowed , rather changes in interest rate are done to keep the currency value fixed at gold parity . Under a gold standard , the burden of adjustments is always put on the country with a relatively weaker currency . Maintaining the gold standard sometimes prevent government fiscal policies to work very effectively . This dampens the effect of discretionary policies on business cycle adjustments .